Principal investigator: Angelo Cruz do Nascimento Varella
Article title: Privatization of State-Owned Sanitation Companies: An Analysis Based on the Experience of Minas Gerais
Article authors: Thiago Guedes de Oliveira and Sonaly Cristina Rezende Borges de Lima
Location of the intervention: Minas Gerais, Brazil
Sample size: Data on the company's operations between 2003 and 2012, as well as other socioeconomic information from the same period.
Sector: Others
Type of Intervention: Effects of sanitation privatization
Main Variable of Interest: Provision of water and basic sanitation services
Evaluation method: Others
Policy Problem
The debate surrounding the privatization of public companies is intense in Brazil. Those in favor argue about the efficiency gains offered by the private sector, theoretically improving the provision of public goods and reducing the need for public investment. However, critics of privatization emphasize that private companies, by prioritizing individual profits, fail to meet the demands of the population and end up devaluing the supply of public goods and services.
Regarding basic sanitation, this issue is even more sensitive, as it directly impacts the health and quality of life of the population, being a right guaranteed by the Brazilian constitution. Therefore, researchers from the Federal University of Minas Gerais (UFMG) are evaluating whether the privatization process of the Minas Gerais Sanitation Company (COPASA) has generated positive consequences and developments for the state of Minas Gerais.
Implementation and Evaluation Context
State-owned sanitation companies were created in Brazil throughout the 1960s, and their responsibilities include providing drinking water and sewage services. The strong wave of public investment that enabled their creation ended during the 1980s, plunging the public system into a considerable economic crisis.
As a result, governors of states such as Minas Gerais, Paraná, Santa Catarina, and São Paulo have begun moves to open the capital of their state-owned sanitation companies to the financial markets, a form of privatization. Among the main arguments are the ease of access to investment and the efficiency gains that can lead to improvements in service delivery and an increase in the company's coverage network.
It is important to highlight, however, that there was no scientific consensus. Several scholars presented opposing arguments and examples, demonstrating that privatization is often not the best approach, especially given the fundamental nature of basic sanitation, which is incompatible with systems based on profit-driven premises. In other words, even if efficiency and investment gains were to actually occur, the benefits would not outweigh the public losses caused by privatization.
Policy Details
COPASA's initial public offering (IPO) took place in February 2006, raising 806 million reais through the trading of shares on the São Paulo Stock Exchange (BOVESPA). This amount represents 40% of the company's net worth in 2005, which was 2,06 billion reais.
Privatization through initial public offering (IPO), which occurs when shares of a state-owned company are offered for sale on the financial market, allows the company to receive private capital and invest in improving and expanding its services. However, upon completing the sale, the state-owned company also assumes the need to operate profitably. In the water and sewage supply market, this phenomenon makes the decision to invest in less developed areas even more difficult.
This phenomenon occurs because the provision of water supply and sanitation services have distinct revenues, costs, and investments. Therefore, operations in hard-to-reach regions, with low urban density, or with lower prospects for return are less profitable and do not always meet market demands. Thus, the researchers conduct a general analysis of information related to the company's performance before and after the privatization process.
Methodology Details
The database that comprises the research was collected from various other databases and research activities. Information on the company's performance and financial results was provided by COPASA itself, for the years 2003 to 2012. Data on service coverage and other socioeconomic aspects were collected from the National Basic Sanitation Survey (PNSB), for the years 2000 and 2008, and from the Demographic Censuses of 2000 and 2010. Finally, to validate the data obtained, 15 interviews were conducted with professionals and researchers in the field.
The statistical tests performed compare the sample averages for each of the variables analyzed and determine whether or not there have been improvements and advances in the provision of services offered by COPASA and other public institutions.
Results
The main findings show that the privatization of COPASA did not meet the expectations of government officials and other stakeholders involved in the process, similar to what other studies in Brazil and around the world have indicated.
Although there have been real advances and improvements in the provision of water and sanitation services in the municipalities served by COPASA, these results do not differ from those of other municipalities in Minas Gerais, even considering those that receive strictly public services. Furthermore, the authors state that the practices adopted by the company after 2006, when it began operating on the stock market, have altered the public nature of COPASA's operations, so that less developed regions are clearly negatively affected. In other words, COPASA begins to ignore its public function, which penalizes those who most depend on the vital service of drinking water and sewage treatment.
Lessons in Public Policy
It is important to emphasize that this work does not definitively conclude that privatizations are inherently bad. Investing in essential public services is a necessary task for any government, and privatization is a viable option. However, it is also necessary to highlight that privatization can be a bad option, especially in cases where the public goods and services offered are essential and irreplaceable, as is the case in Minas Gerais with water supply and basic sanitation.
When planning a privatization process, it is essential to consider that people's lives can be affected by the pursuit of profit and that it is the government's duty to prevent the financial system from prevailing over the fundamental rights of its citizens. After all, a developed society depends on the health of its population.
Therefore, taking into account the social costs of a privatization system is mandatory and should guide any planning and monitoring systems aimed at privatizing national public assets.
Reference
Oliveira, Thiago Guedes de; Lima, Sonaly Cristina Rezende Borges de. Privatization of State Sanitation Companies: An analysis based on the experience of Minas Gerais. Environment & Society, V. 18, P. 253-272, 2015.
